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Friday, 8 January 2010

Bringing Islamic Banking to India

There are more Muslims in India than there are in Pakistan, which is why it is surprising that successive governments have so far done nothing to bring Islamic banking into India. The consequence of such neglect is that millions of observant Muslims are forced to park their savings in dubious entities,because they have been deprived of financial institutions in India that are Sharia-compliant and avoid the payment of interest,because of its ban in the Quran (3:130).

Indeed, the Quran sets forth some very healthy financial principles,such as the avoiding of the giving of finance to unsavoury businesses (5:2), and the showing of compassion to the financially disadvantaged (2;280). As has been pointed out by several scholars,the prohibition of interest is not unique to Islam,but is also found in Judaism and Christianity ( Psalms 15:5, Nehemiah 5:7). However,throughout the world,the giving and taking of interest has become widespread Financial experts estimate that more than $50 billion of funds from the Gulf can flow to India,should Islamic banking institutions be set up in the country. This will generate 2.7 million jobs in the country,both directly and indirectly. At present,almost all the surplus cash of the Gulf countries is parked in London (which, ironically, is the world’s top “Islamic Banking” centre), New York,Zurich and Frankfurt. Naturally,the financial instititions headquartered in these locations would not like to see India emerge as a competitor in the parking of funds from the Gulf.

They are aware of the strong historical and civilisational ties between India and the Arab world,and are nervous that this may result in funds moving away from them. Indeed,many Arabs are justifiably upset that they have suffered a collective loss of $1.3 trillion because of the numerous malpractices of financial institutions in the US and the EU,and would prefer to place their money in India. However,thus far,because of the immense influence that financial entities in the US and the EU have over the Reserve Bank of India and the Ministry of Finance,thus far, the policy changes needed to attract such funds have not come about So pervasive is the influence of US and EU funds over India’s financial policymakers that the Reserve Bank of India significantly slowed down economic expansion in India during 2007-2008 by raising interest rates to levels not seen in more than a decade.

Although the RBI justified this as an anti-inflation measure,they themselves know that such painful steps have no impact on price rise,caused as this is by speculation and by policies that favour the middleman over the producer and the consumer. All that the policy of high interest rates has done was to make several segments in Indian industry less competitive than they were when interest rates were low. The policies followed by the monetary authorities in India have forced several corporates to borrow money from London and other centres in the developed world,at a profit for these centres of 3%.

Small wonder that there is so much pressure on India to prevent the authorities from taking steps that could attract funds from the Gulf. Had the authorities in India encouraged their domestic companies the way policymakers in the US and the EU unfailingly do,India would not have been in today’s situation,when even tiny Taiwan exports double the volume India does Recently,the government of Kerala,a state that has ties with the Gulf that go back for 1600 years,sought to set up an Islamic Banking division in one of their financial institutions. However, a politician having close links with a section of the Hindu religious leadership has got the Kerala High Court to stay the operationalisation of this move.

India’s courts are famously liberal when it comes to granting stays,with some even lasting for decades.In countries such as the US or the UK, stays are granted only after the court is convinced that there exists a strong prima facie case in favour of the individual making the request. In the case of India, stays by a court are granted far more liberally.The Kerala High Court order means that the attempt by the state’s Communist rulers to set up an Islamic banking system in a state where 20% of the population are Muslims may be indefinitely delayed.Bankers in Europe and in the US can rest easy, knowing that it may be a long time before the estimated $1.16 trillion dollars parked in so-called “Islamic Banking” institutions in these locations faces competition from India

Although it is true that several policymakers allow themselves to be unduly infuenced by interested parties operating overseas,the fact remains that overall,India’s policymakers are a patriotic group. Indeed, with all their faults,India’s administrators have done a commendable job in ensuring a modicum of stability in the face of frequent political upheavals.Hence,this columnist is optimistic that it will not be long before India copies the Malaysian model,and brings Islamic banking into the country. Closer economic interaction between India and the Gulf is in the interests of both sides. The GCC countries and India are complementary in their skills and congruent in their interests. The setting up of Islamic banking divisions within the existing banking network in India would ensure a substantial flow of investible funds into the country.

Of course,none of this money would get diverted to industries such as gambling and alchohol, that are barred in Islam. A beginning has been made by the Jamaat-i-Islami Hind,which has set up a committee on Islamic banking under a noted scholar,Mr Abdur Raqeeb. Some influential policymakers within the Congress Party are also active in seeking to overcome the block to Islamic banking that has been artificially created by international interests keen to ensure that India does not take money away from them India is a secular country,and therefore Islamic banking needs to be seen not as a “Muslim” issue,but as one that involves the welfare of each citizen,whether Muslim,Christian, Hindu, Jain, Sikh or Buddhist. After all, the huge volume of remittances from Indians working in the Gulf benefits the entire country and not simply those belonging to a particular religion. Islamic banking therefore needs to be viewed less as a religious right than as a secular advantage. Allowing India’s observant Muslims to gain access to domestic funds that are Sharia-compliant would ensure that they avoid getting duped by unregulated and often dubious entities that seek to profit from their faith. The Islamic world is India’s natural partner,and one way of strengthening such linkages would be through the introduction of Islamic banking in India Indeed,it can be argued that the healthy financial principles mentioned in the Quran were the earliest enunciation of the “mutual fund” concept. Unless mutual gain comes from mutual effort, and unless moral principles are given primacy in decision-making,the wotkd will witness further man-made catastrophes such as the 2008 financial crash.

This was caused entirely by the greed of some 380 individuals, who were the prime movers in the relentless speculation that artificially drove up the prices of commodities such as foodgrains,copper,steel and oil. Sadly, apart from a handful,not one of the 380 have suffered any legal consequence of their devastating economic attack on humanity.Indeed,the Obama administration seems as deferential to them as was George W Bush.Small wonder that speculation in commodities is once again rearing its poisonous head,making the price of oil and other essentials rise despite the weakened state of the international economy. Judging by the way in whuch Barack Obama,Gordon Brown,Angela Merkel and others are obedient to their whims, it looks as though those guilty of causing the distress of hundreds of millions in their insatiable greed for money will once again plunge the world into chaos,and soon.

In such a context,the need to create financial systems grounded on moral values becomes clear.Should Islamic baning entities finally get sanctioned in India,and should they function in the way that is intended,then not only Muslims but Hindus and others will start putting their savings in them. As the sages say, we need to look for good everywhere, so as to reach it everywhere.